When applying for a mortgage, it’s difficult to know when to float your rate and when to lock your rate in. Rarely do rates rise or fall in a straight line. Typically, they steadily increase or steadily decrease through a series of peaks and valleys. The goal is to lock in at the most opportune time during the mortgage process.
Many mortgage loan officers have the benefit of subscription services that monitor interest rates and provide lock alerts. Even then, locking is not an exact science. Every situation is different. Sometimes it makes sense to capitalize on those lock alerts; for example, when the market is deteriorating and a loan is closing soon. Other times, it makes sense to float the rate; for example, during an improving market when a loan is not expected to close soon.
Improving Markets
In an improving market, rates steadily decline or improve. There may not be any rush to lock in your interest rate. If you do lock in your rate and rates go down, you cannot arbitrarily re-lock at the lower interest rate. This is because your executed rate lock hedges funds in the secondary market, perhaps at a cost to your lender.
If your loan isn’t closing soon, it may be more advantageous to float your rate until you are within a few days of closing.
If you find yourself in a situation where you have locked in your rate then rates tick down, ask your loan officer about your options. Lenders have a re-lock policy, but most require you to wait 30 to 45 days after your existing lock expires to take advantage of lowered market rates. If you attempt to re-lock too soon, you may be subject to worst-case pricing (e.g., the original rate you locked in or the current market rate – whichever is higher) and extension fees. If you hold out long enough, you may be able to take advantage of lower market rates. The wait-and-watch option may work for those who are refinancing, but home buyers do not have the same luxury. Delaying closing while holding out for a better interest rate could cost you your new home altogether. Take care, too, that while you wait loan documents do not expire. If you wait too long, you may find yourself paying for a new appraisal.
Deteriorating Markets
In a deteriorating market, rates steadily or sharply rise. Generally speaking, it is better to lock sooner rather than later. Once you lock your rate in, you are protected in the event rates increase.
In my experience, rates rise quickly and fall slowly. More often than not, I have observed gamblers play the market in hopes of an improvement only to find themselves saddled with a higher rate than they would have received had they locked earlier in the loan process.
To Lock or Not to Lock
I frequently say that I trust market experts about as much as I trust weathermen: sometimes they get it right, and sometimes they don’t.
Mortgage loan officers can shed light on how the market has been trending and quote current pricing, but no one can forecast with complete reliability what rates will do in the near or distant future. Experts make educated guesses based on statistical data. But I’ve seen them get it wrong too many times to blindly rely on their advice.
Whether you lock your rate or float it is up to you – not your loan officer. Listen to their advice. Ask questions about what the market has been doing in recent days, weeks, and maybe even months. Then, make an educated decision for yourself on how to proceed.
Jennifer Goldsby, NMLS #591226 | VP, Renovation Lending
Diamond Residential Mortgage Corporation NMLS #186805 | Equal Housing Opportunity
Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.
